2005

​We study optimal fiscal policy in an economy where (i) search frictions create a coordination problem and generate multiple, Pareto-ranked equilibria and (ii) the government finances the provision of a public good by taxing market activity. The government must choose the tax rate before it knows which equilibrium will obtain, and therefore an important part of the problem is determining how the policy will affect the equilibrium selection process. We show that when the equilibrium selection rule is based on the concept of risk dominance, higher tax rates make coordination on the Pareto-superior outcome less likely. As a result, taking equilibrium-selection effects into account leads to a lower optimal tax rate.

​This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach leads to a well-defined optimal policy problem, and has important implications for the conduct of government policy. We illustrate these implications using a simple model of technology adoption under network externalities.

In this paper I provide an example of sorting equilibrium non-existence in a three-community model of the type introduced in Caplin and Nalebuff (1997). With two communities such an example has been shown to exist only when the dimension of the policy space is even. It turns out, however, that with three communities existence may fail regardless of whether the policy space dimension is odd or even. This suggests that the original odd/even dichotomy can, at least in part, be explained by the evenness of the number of communities.

In a social choice model with an infinite number of agents, there may occur "equal size" coalitions that a preference aggregation rule should treat in the same manner. We introduce an axiom of equal treatment with respect to a measure of coalition size and explore its interaction with common axioms of social choice. We show that, provided the measure space is sufficiently rich in coalitions of the same measure, the new axiom is the natural extension of the concept of anonymity, and in particular plays a similar role in the characterization of preference aggregation rules.

I analyze how an exogenous cost of entry in a risky asset market affects two endogenous variables: the degree of market participation and price volatility. I show that different entry costs generate different participation equilibria and that a multiplicity of equilibria may arise, but that the new market entrants are always more risk-averse than the rest of the participants. Every participation equilibrium is associated with a volatility of the asset price. Increased market participation leads to increased asset price volatility and higher welfare.

We test for the presence of market discipline in the banking sector in early 20th century Mexico. Using a panel of financial data from note-issuing banks between 1905 and 1910, we examine whether bank fundamentals influenced the pattern of withdrawals. If we do not control for exit, our estimation suggests that fundamentals were not a significant determinant of depositor behavior. Instead, bank specific fixed effects and systemic risk seem to have been the most important determinants of net changes in deposits. However this period included the banking crisis of 1907 and the subsequent exit of several banks. Our results change when we use a two step estimator to take this into account. Controlling for the selection bias created by exiting banks, we show that fundamentals were indeed an important determinant of bank withdrawals in this period, indicating the existence of market discipline.

Faced with limited resources, policy makers need to know when and where to target support for displaced workers. The academic literature offers little support, presenting widely-ranging results without a consistent explanation for the observed differences in wages after workers are displaced. In this paper, we demonstrate that the heterogeneity found in the literature is consistent with varying market conditions. The results suggest that support for displaced workers can be more efficiently allocated by considering the timing and location of displacement.

We construct a novel data set matching occupational data from separate establishments to the establishments' corporate parents in order to study labor market links across establishments within diverse firms. We find substantial wage components common to all establishments within firms, even after netting out industry and occupation effects. However, employment changes are localized to establishments. The data suggest that internal labor markets of multi-establishment firms are linked throughout their entire organizations, but that establishment-level demand shocks do not permeate throughout the firm.

In this paper we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.

We study the evolution of the distribution of assets in a discrete time, deterministic growth model with log-utility, a minimum consumption requirement, Cobb-Douglas technology, and agents differing in initial assets. We prove that the coefficient of variation in assets across agents decreases monotonically in a transition to the steady state from below, if (i) the consumption requirement is zero, or (ii) the consumption requirement is not too big and the initial capital stock is large enough. We also show how a positive consumption requirement or a small elasticity of substitution between capital and labor can generate non-monotonic paths for inequality.

This article explores a model of firm-specific training in a job search environment with labor turnover. The main substantive finding is a positive association between training and wages (when dispersed). The article then precisely characterizes how both wage dispersion and firm profitability depend on the flow value b>=0 of workers' unmatched time. It is shown that: (i) for all high values b, no equilibrium exists; (ii) for intermediate values b, multiple equilibria arise, where firms earn zero profits, and choose from a general wage distribution; (iii) for all lower values b, there is a unique equilibrium, with firms earning positive profits, and choosing from an atomless set of wages.

We consider the preference aggregation problem in infinite societies. In our model, there are arbitrarily many agents and alternatives, and admissible coalitions may be restricted to lie in an algebra. In this framework (which includes the standard one), we characterize, in terms of Strict Neutrality, the Ultrafilter Property of preference aggregation rules. Based on this property, we define the concept of Limiting Dictatorial rules, which are characterized by the existence of arbitrarily small decisive coalitions. We show that in infinite societies which can be well approximated by finite ones, any Arrovian rule is Limiting Dictatorial.